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A future of cheap oil


An ongoing price slump is rattling the industry and weakening petrostates. How will low prices change the world? Here’s everything you need to know:

How cheap is oil?
Prices have hovered between $40 and $50 a barrel for the past year — far below the pre-collapse high of $147 a barrel in 2008. The U.S. shale revolution continues to cause a global glut in supplies of the liquid fossil fuel, depressing the price, and energy company Shell says it is bracing for a world where oil prices might stay “forever low.” Oil prices have historically been highly volatile, and demand for the commodity is higher than ever. But if the glut continues, it will pose an existential threat to the monarchy ruling Saudi Arabia, which relies on oil for as much as 70 percent of the kingdom’s income. Other petrostates, including Venezuela and Russia, are already in a state of economic crisis. Rabah Arezki, a commodities expert at the International Monetary Fund, says that the growing supply of natural gas, a potential electric car revolution, and the push to further develop clean energy to combat climate change all will combine to suppress demand for the foreseeable future. The world may be “at the onset of the biggest disruption in oil markets ever,” Arezki says.

What is causing the glut?
The biggest factor is an American petroleum boom. Oil and gas businesses in Texas and North Dakota upended the entire industry in the late 2000s when they pioneered new fracking techniques — blasting fluid into layers of shale rock to unlock hard-to-extract oil and gas deposits. That sent a torrent of oil flooding into the market: U.S. crude output rose from 5.5 million barrels per day in 2010 to 9.2 million barrels at the beginning of 2016 — about the same as the Saudis produce. New oil from Iran and the Canadian tar sands added to the glut. American motorists are enjoying the resulting low gasoline prices, but for petrostates, it’s been a nightmare.

How did these countries respond?
When oil prices collapsed in the past, Saudi Arabia used its sway over the Organization of Petroleum Exporting Countries (OPEC) to lower production and drive up prices. This time, though, Saudi Arabia, Libya, Kuwait, and other OPEC countries purposely kept pumping oil for two years to keep prices low, in hopes of driving their U.S. and Canadian competitors out of business. The Middle Eastern cartel has the advantage of sitting on vast deposits of oil that costs just $8 to $10 to extract, compared with more than $54 for most shale-oil wells, and their strategy successfully bankrupted 123 companies operating in North America. But it also had the unintended effect of driving the surviving shale rigs to become more technologically efficient, allowing those rigs to push their average break-even price down to $40 a barrel. And so the U.S. remains among the world’s largest oil producers, and prices remain stubbornly low.

So what can petrostates do now?
Crown Prince Mohammed bin Salman, the bold new heir to the Saudi throne, has come up with a revolutionary plan to wean the kingdom off oil, known as Saudi Vision 2030. (See below.) In Venezuela, the collapse in the oil price has pushed the country into a seemingly unstoppable economic death spiral — while in Russia, which depends on oil prices north of $100 per barrel to meet its budget projections, the economy is mired in a deep recession. Russian President Vladimir Putin has fallen back on his “time-honored response to economic hardship,” says John E. McLaughlin, a security analyst at Johns Hopkins University. And that is to “mobilize nationalist sentiment with foreign adventures,” such as his incursions into Ukraine and Syria.

How are energy companies adapting?
A growing number are shifting their investment strategies to renewable energy technologies. The French oil giant Total has bought several battery and solar-power businesses; ExxonMobil is investing in biofuels and fuel-cell research. In the short term, however, oil will remain a dominant fuel source. With the developing world modernizing rapidly, demand is not expected to peak until the mid-2040s. So oil companies continue to pump and pump. U.S. oil output is expected to hit 10 million barrels a day in 2018, breaking the record set in 1970. That boom has obvious implications for climate change, and it also carries a risk for the entire oil industry.

What could happen?
If U.S. producers turn out too much oil, they could create a glut so severe it drives prices below what even the most efficient North Dakota and Texan drillers can afford. After finally cutting its own production levels last year, OPEC pleaded for U.S. shale-oil producers to do the same this May — proving how important the U.S. has become in the world of oil. “I think [OPEC] are now acutely aware that they don’t have the kind of influence they used to have,” says Tom Pugh, commodities economist at Capital Economics. “Shale is now the swing producer in the market.”

Imagining a new Saudi Arabia
How does one of the world’s wealthiest petrostates break its addiction to oil? Crown Prince Mohammed bin Salman has some bold ideas, which he’s put together in the Saudi Vision 2030 project. As part of that plan, he is selling off a chunk of the state-owned oil company, Saudi Aramco, which is worth up to $2 trillion, and placing the proceeds in a sovereign-wealth fund that will invest in finance and infrastructure projects around the world. The Saudi government also plans to invest heavily in mining the country’s gold, phosphate, and uranium reserves, and is also betting big on tourism. Mohammed plans to build the kingdom’s own Las Vegas south of Riyadh, and the notoriously repressive kingdom will also build a new Red Sea beach resort with special laws allowing women to wear bikinis instead of covering up from head to toe. Many foreign critics say Mohammed’s goal of weaning Saudi Arabia off oil by 2030 is pure fantasy; others see it as a necessity if oil prices remain low. “Vision 2030 sounds like a positive project,” says Bassem Snaije, an expert in Middle Eastern economics. “I would call it Obligation 2030.”

the week

17 Comments on "A future of cheap oil"

  1. rockman on Sun, 13th Aug 2017 6:14 pm 

    So many misrepresentations of historical FACTS I don’t know where to start. So I won’t. LOL.

  2. bobinget on Sun, 13th Aug 2017 7:37 pm 

    If my posts are being blocked, kindly email.
    bob Inget

  3. Makati1 on Sun, 13th Aug 2017 8:31 pm 

    Oil is NOT the most important thing in this world”

    “Punishing drought threatens yields, income for thousands of Iowa farmers”
    “Montana grain harvest ranges from average to catastrophic”
    “SD farmers to take in smallest wheat harvest since 2002, also a drought year”
    “It’s Getting Harder And Harder For Trees To Bounce Back From Drought”
    “Expanding drought covers over half of Montana”
    “Nitrogen fertilizer poses significant threats to humans and the environment”

    “Fleas found to carry the plague in at least 2 Arizona counties”

    “New Orleans braces for new flooding as it copes with power outages, failed pumping system”
    “Nobody Knows What Lies Beneath New York City”

    Mother Nature is just getting warmed up. Pun intended.

  4. bobinget on Sun, 13th Aug 2017 8:49 pm 

    Saudi crude storage falls to a 65 month low of 259 MM barrels in May

    One has to wonder if Ghawar has peaked. Mathew Simmons had done some substantial
    research. Obviously, what he found from that research done prior to publication in
    2005 of “Twighlight in the Desert” was either early or incorrect. If it was early that decline may be very well be
    showing up now. SA has only produced more than it is producing now for short
    periods of time. Its fields are all old. The majority of the kingdom’s output comes from fields that have been producing for decades and are increasingly mature.

    Among the big oilfields, Dammam was discovered in 1938, Abqaiq in 1940, Qatif in 1945, Ghawar in 1948, Safaniya in 1951, Khursaniya in 1956, Khurais and Manifa in 1957, Berri in 1964, Zuluf in 1965, Jana, Karan and Marjan in 1967, and Shaybah in 1968.

    Saudi Aramco and its contractors have sustained production by drilling additional wells and employing enhanced oil recovery techniques to sweep the remaining oil toward the wells.

    But the older fields like Ghawar must be coming under increasing pressure as they enter their fifth and sixth decades.

    At the same time, Saudi Arabia has been increasing its total production to meet rising demand from domestic consumers and defend its share of export markets.

    Saudi Arabia raised crude production from an average of 7.6 million barrels per day in 2002 to 9.7 million in 2014 and 10.3 million in the third quarter of 2015, according to the U.S. Energy Information Administration.

    Drilling has been increasing by SA primarily by using rigs that are capable of
    drilling long horizontals.

    But it seems safe to assume that at least part, perhaps a big part, of the increased drilling reported over the last decade is being driven by the need to sustain production in the face of heavy exporting from aging fields.

    The same is true across the other countries on the Arabian peninsula: more drilling is needed to offset the natural decline in output from aging fields.

    plagiarism used.

  5. bobinget on Sun, 13th Aug 2017 8:57 pm 

    KSA: Sixty five month storage LOW IOW’s
    “Running paycheck to paycheck”

    Sunday tweet: Saudi requests Iraq to referee talks with IRAN.

    IMO, KSA palace fighting for it’s life.

  6. deadlykillerbeaz on Sun, 13th Aug 2017 11:20 pm 

    Oil is not cheap. Oil is a quality energy source that is usable.

    It is maybe inexpensive, but not cheap by any means.

    We do not believe any group of men adequate enough or wise enough to operate without scrutiny or without criticism. We know that the only way to avoid error is to detect it, that the only way to detect it is to be free to inquire. We know that in secrecy error undetected will flourish and subvert. – J Robert Oppenheimer

  7. Davy on Mon, 14th Aug 2017 5:59 am 

    “rapid-response gas.”

    “Fast, Dirty Natural Gas Plants Get Boost From Electric Cars”

    “Britain’s goodbye to fossil-fuel cars by 2040 could boost the need for dirtier natural gas-powered stations. The government’s goal to replace gasoline and diesel cars with those powered by electricity could see the construction of so-called open-cycle gas stations, said Carsten Poppinga, senior vice president of trading and origination at Statkraft AS, the Norwegian utility that operates hydro power plants and wind farms across the U.K. Such units can keep the grid from buckling from the strain of people charging cars in peak demand periods. The catch? While the plants can start generating power almost instantly, they don’t recycle waste heat, making them emit more greenhouse gases per megawatt than the combined-cycle stations that comprise the largest share of the U.K.’s daily power output.”

    “Britain may have no choice but to use the less environmentally friendly option, though. With little spare generation capacity, the nation is vulnerable to power shortages, particularly on cold, winter days when wind and solar energy may be in short supply. “Fundamentally there isn’t as much overcapacity on the British market as in Germany,” Poppinga said by phone from Dusseldorf. “You could think about building open-cycle gas power plants to increase the flexibility in the system.”

    “till, the flexibility of the plants will help more intermittent renewables enter the system, bolstering the shift toward cleaner energy, according to Drax Group Plc. The utility plans four open-cycle plants in the U.K. that it calls “rapid-response gas.”

  8. paultard on Mon, 14th Aug 2017 6:32 am 

    good morning guys. just want to start the week with a postive note about my passionate subject of fighting poverty.

  9. paultard on Mon, 14th Aug 2017 6:37 am 

    some enterprising individual going to start a small arms unit developing, manufacturing, and selling combat gears spefically for women.

  10. paultard on Mon, 14th Aug 2017 7:19 am 

    guys last week was a story about the petite Anny Divya flying a 777.

    the tard explanation for flying is that lift, drag, and thrust. how tarded. everyone knows that so it didn’t help me at all.

    flying dynamics involves air trimming such as rudder, wing pods which are just mathematical flux equations designed to stablize a plane.

    Basically a modern plane is designed to “stay” where it is. so women can fly it LOL.

    This is all marketing. Now the DailyMail is having this woman who’s fascinated with flying for the “technical aspect” of it.

    Love it. Women in combat. women flying close support missions.

  11. paultard on Mon, 14th Aug 2017 7:19 am 

    using hot women is how you get others to join the game. it’s marketing.

  12. rockman on Mon, 14th Aug 2017 8:21 am 

    Paul – “… and selling combat gears spefically for women.” The small caliper/low recoil weapons used by the US military are well suited for use by women.

    From an aesthetic stand point a number of US companies sell pink weapons. LOL. Seriously.

  13. bobinget on Mon, 14th Aug 2017 10:03 am 

    Most DOMESTIC killings, including suicide are
    gun related.

    Any man or woman who abuses a ‘partner’, is prone
    to depression, with children, has a handgun in the home, just shorted his or her lifespan by decades. Fact.

    Oh, you will properly point out, a car or truck can be weaponized. Key word here is ‘weaponized’.
    No one ever ‘weaponized’ functioning armaments.

  14. paultard on Mon, 14th Aug 2017 10:08 am 

    bob, i’ve seen modern slavery myself. i myself was a victim of attempted slavery.

    Frederic Bastiat wasn’t kidding when he said men want to plunder. Why not let women doing a bit of kiling/plundering eh?

    we need our weapons bro.

  15. bobinget on Mon, 14th Aug 2017 8:53 pm 

    Oil Demand Growth is Outstripping Expectations Says Goldman Sachs
    Oil Demand Growth is Outstripping Expectations Says
    Goldman Sachs
    Economic growth is driving a faster than expected rebound in oil demand, with early June figures
    suggesting the biggest demand increase in almost two years.
    Paul Whitfield Aug 14, 2017 4:57 AM EDT

    Economic growth is feeding through into a faster than expected increase in oil demand in the coming months, with
    incomplete figures for June suggesting consumption grew by about 3.1 million barrels, year-on-year, the biggest
    gain in almost two years.
    Early data, from Goldman Sach’s “Oil Demand Tracker” report, indicates that oil demand growth has accelerated in
    the past few months in both emerging and developed economies, prompting the investment bank to speculate that
    growth in demand could surprise on the upside over the second half.
    “Our 2H17 $52/bbl Brent and 3.7% yoy global real GDP growth forecasts lead us to forecast demand growth of
    1.60 mb/d in the second half,” the report noted. “With recent activity and oil demand levels surprising us to the
    upside, we view the risks to our above consensus 1.63 mb/d annual demand growth forecast as skewed to the

    Brent Crude futures for delivery in October traded Monday, August 14, at $52.07, marginally lower on the day, but
    up $3.16 or 6.5% over the past month. U.S. benchmark West Texas Intermediate futures for September were also
    marginally lower on Monday at $48.78.
    Goldman’s bullish demand assessment was supported on Friday by the International Energy Agency, which said it
    expected 2017 oil demand growth to weigh in at 1.5 million barrels per day, up from an earlier forecast of 1.4
    million barrels per day.
    “We believe that the biggest driver for this robust demand is strong economic growth in recent months,” noted
    Goldman “While strong activity indicators earlier this year were mostly confined to survey data and in the case of
    oil further undermined by warm winter weather, our economists’ Current Activity Indicators have continued to show
    broad based acceleration in the real activity indicators in both EM and DM economies.”
    Demand growth in emerging markets is being driven by increased spending on domestic gas and gasoline products, an indicator
    of increased consumer spending. Developed market demand was mainly coming from the industrial sector, which is likely to
    prove a leading indicator for consumer spending in western markets, according to Goldman.
    The banks analysis was based on June demand data from the U.S., Japan, India, China, Korea, Brazil, Mexico, Spain and
    France, which together account for about 52% of global oil demand.

  16. bobinget on Tue, 15th Aug 2017 9:52 am 

    Cheap oil fueled ‘strong demand’. That’s a fact.

    WHEN the truth hit the fan, Venezuela, Ecuador curtail shipments to US ports, it won’t mean there’s
    one fewer barrel of oil on the planet. It only means
    the free ride is ending.

    Far too much weight is put on US storage. One or two million barrels ‘too many’ Not enough emphasis
    on US consumption. WE become fixated on inventories, which should offer some security, instead, short sellers in defense of millions of barrels of speculative oil, keep naming a few hours of available oil as “glut”.

    Instead of celebrating zero shortages, no easy task considering 20.2 million barrels burnt daily we punish oil companies for losing money on every step.

    Traders, aided by a hundreds of ‘bots’ spreading
    bearish gibberish are planning a bodacious move.
    Scare daylights out of small holders, buy up hurting
    shares, then almost over-night, shift to a shortage bias.

    No one will blame those touting the bearish scenario as ‘change’ will come from events unanticipated by most citizens.

  17. Davy on Tue, 15th Aug 2017 10:00 am 

    “WHEN the truth hit the fan, Venezuela, Ecuador curtail shipments to US ports, it won’t mean there’s one fewer barrel of oil on the planet. It only means the free ride is ending.”

    Bob, get a grip, oil is an internationally traded commodity with multiple market idiosyncrasies. You are not going to see the US hurt and others improved like a decoupling event. We are all in this together. We all are effected by oil market activity. You are lost in a dead end narrative.

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